No matter how you got here, congratulations, you've decided to take early retirement. Setting yourself up to live life as you see fit is one of the American Dreams.

A serious problem with retiring early (besides figuring out what to do with all that time) is that when you stop working before age 60, the IRS doesn't necessarily see you as a retiree. That's why you need to be tax smart about managing your retirement accounts. Here are some things to think about....

Should I Roll Over My 401(k)?

Yes. Rolling over your 401(k) almost always makes sense because why would you want your former employer overseeing your account? Taking control of that money will allow you to have a whole world ful of investment options. Your plan probably has at most 20 mutual funds to pick from. A rollover IRA will give you thousands of choices.

If you want some of that money immediately and you're over age 55 (but younger than 59 1/2) take the money out first and then roll over the rest of the account. Thanks to a convenient penalty exception for those who quit or retire between those ages, you can take payouts from company-sponsored qualified retirement plan accounts and dodge a 10% early withdrawal penalty. The amount will be taxed, but at least there is no penalty.

When Not to Roll Over: Company Stock

A rollover may not be the best option when your qualified retirement-plan account contains low-cost stock from your former company. If the current market value of the company shares is high in relation to their cost, you should strongly consider withdrawing the shares now and paying the resulting taxes.

THis will result in your tax bill being based on the (low) cost of the shares, rather than their (high) market value. If you're under age 55, you'll still owe the 10% penalty. Since the cost of the stock is low, the tax hit will probably be manageable even after the penalty. What's the purpose of this strategy? You are positioned to pay only the 20% capital-gains tax on the difference between the cost of your company shares and the selling price.

Here's of how cashing in your company stock could benefit you:

You bail out of your job at age of 52. Your company 401(k) account is worth $500,000. Of that, $200,000 is invested in company shares with a cost of $25,000. By following the advice, you'll roll over $300,000 tax-free into your IRA. Now withdraw the company stock and put the shares into a taxable account. You'll owe income taxes on $25,000, which is the cost of the stock. You'll also owe a 10% penalty (because you're not age 55 or older) on the $25,000. That makes the total tax hit including the penalty be 41% or $10,250 (.41 x $25,000).

The good news is your company stock is now considered a capital asset. This means that if you sell the stock for $200,000, you'll only owe the 20% capital-gains tax on your $175,000 profit. After tax and penalty you will have netted $165,000. In contrast, if you roll the shares over into your IRA, your profit will be taxed at regular rates when you start taking IRA withdrawals.

If you hang onto the shares for over a year as they appreciate, things will be even better for you as any additional profit will also qualify for the 20% capital-gains rate.

Cautionary note here: To be eligible for the favorable tax treatment, your company stock must be received as part of a lump-sum distribution from the qualified retirement plan or plans in which you participate. Check with your employee-benefits department to make sure your retirement-plan payout qualifies as a lump-sum distribution.

Tapping your IRA

Unlike a company-sponsored plan, IRAs for people between the ages of 55 and 59 1/2 receive no special treatment.. So if you tap your IRA before official retirement age, you will get hit with the 10% early withdrawal penalty. There are some penalty exemptions listed here:

* Annuity-like withdrawals taken over your life expectancy. The withdrawals must be taken at least annually for a minimum of five years or until you turn 59 1/2, whichever is later.

* Withdrawals to pay qualified higher-education expenses for you or your children.

* Withdrawals to pay deductible medical expenses in excess of 7.5% of your adjusted gross income.

* Withdrawals to pay for a qualified home purchase (there's a $10,000 lifetime limit on this exception).

* Withdrawals after death or disability.

Tapping Your Roth

Earnings in your Roth IRAs earnings can be withdrawn totally tax-free only if: (1) the account has been open at least five years, and (2) you are at age 59 1/2, or will use the money for one of the excepted purposes listed above. If you don't pass both parts of the test, the earnings are taxed when withdrawn.

For withdrawals before age 59 1/2, you'll also owe the 10% penalty on those withdrawn earnings unless you meet one of the penalty exceptions listed above. That penalty will also apply if you withdraw "conversion contributions" within five years of the conversion. Conversion contributions are those you made by converting a traditional IRA into a Roth.

On the other hand, you can generally withdraw Roth contributions tax-free and penalty-free. You shouldn't do it, though, because taking withdrawals mean you'll have that much less to continue investing on a tax-free basis. Also, if you need the money so badly that you tap your original contribution, you probably ought to keep working.